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Crisis and Breakdown

“Either
the socialist transformation is, as was admitted up to now, the consequence of
the internal contradictions of capitalism, and with the growth of capitalism
will develop its inner contradictions, resulting inevitably, at some point, in
its collapse, (in that case the “means of adaptation” are ineffective and the
theory of collapse is correct); or the “means of adaptation” will really stop
the collapse of the capitalist system and thereby enable capitalism to maintain
itself by suppressing its own contradictions. In that case socialism ceases to
be an historic necessity. It then becomes anything you want to call it, but it
is no longer the result of the material development of society."

Rosa
Luxemburg

By Doug
Enaa Greene

August 10, 2017 — Links International Journal of Socialist Renewal — “It is easier to imagine the end of
the world than to imagine the end of capitalism,” the Marxist literary critic
Fredric Jameson once remarked. Capitalism does many terrible things to
multitudes of people. Everyday, workers go to alienating and exploitative jobs
with no purpose, save to get by, while their labor enriches the ruling class – whose
sole interest is endless accumulation and profit. Throughout the world, there
are billions in abject poverty. Capitalism reproduces and reinforces systems of
oppression such as patriarchy, nationalism, and racism. Yet many left-wing
parties and theorists argue that capitalism is here to stay. They do not see
crisis and breakdown as inherent to capitalism, but that the system's
contradictions can be tamed by increasing the purchasing power of workers or
better regulation. In other words, none of their solutions consider ending
capitalism, so the working class should just accept the system as permanent.
Others argue that while capitalism is unjust and exploitative, they don't
believe it has material limits, so they resort to moralistic appeals to
overthrow it.

Contrary
to both positions, Marx argued that “within bourgeois society... there
arise relations of circulation as well as of production which are so many mines
to explode it.”[1] Capitalism contains within itself the seeds of its own
downfall, and to claim otherwise “would be quixotic.”[2] According to Marx,
capitalism is a historical and transitory system – it contains both a beginning
and an end. The cause of capitalist crisis and breakdown is the law of the
tendency of the rate of profit to fall.[3] The tendency of the rate of profit
to fall is the underlying (although not the proximate) cause of crises, and
leads the system to breakdown. Despite capitalism's internal contradictions
leading to breakdown, there are countertendencies that allow it to recover from
a crisis and restore profit. The breakdown theory does not mean that capitalism
will collapse on its own, but reveals the objective conditions under which
revolutionary action can, and will, arise to replace bourgeois society. The
final breakdown of capitalism will be the socialist revolution led by the
working class: “History is the judge—its executioner, the proletarian.”[4]

I. Capitalism

A. Competition and Expansion

The guiding end and aim of capitalism is the system's intrinsic drive to
accumulate profits as quickly as possible. Marx lyrically describes this
religion of capital as follows:

Accumulate, accumulate! That is Moses
and the prophets! 'Industry furnishes the material which saving accumulates.'Therefore save, save, i.e. reconvert the greatest possible
portion of surplus value or surplus product into capital! Accumulation for the
sake of accumulation, production for the sake of production: this was the
formula in which classical economics expressed the historical mission of the
bourgeoisie in the period of its domination. Not for one instant did it deceive
itself over the nature of wealth's birth-pangs.[5]

The
tendency of capitalism to expand without limits makes it a dynamic and
universalizing force, in contrast to other modes of production. Capital
overcomes old barriers and limits and strives to remake the world in its own
image:

capital drives beyond national barriers and prejudices as much as beyond nature
worship, as well as all traditional, confined, complacent, encrusted
satisfactions of present needs, and reproductions of old ways of life. It is
destructive towards all of this, and constantly revolutionizes it, tearing down
all the barriers which hem in the development of the forces of production, the
expansion of needs, the all-sided development of production, and the
exploitation and exchange of natural and mental forces.[6]

The
accumulation of capital produces a free market that spans the globe, dominated
by the laws of competition. No capitalist is alone on the market when offering
their products to consumers, there are other competitors to contend with. An
individual capitalist is compelled to produce, exploit and accumulate or they
will be driven under. For capitalism, the pursuit of profits, 'excessive' or
otherwise, always comes first and people always last. As Marx says,

The development of capitalist production makes it necessary
constantly to increase the amount of capital laid out in a given industrial
undertaking, the competition subordinates every capitalist to the immanent laws
of capitalist production, as external coercive laws. It compels him to keep
extending his capital so as to preserve it, and he can only extend it by means
of progressive accumulation.[7]

Each
capitalist wants as large a share of the market as possible for their products,
but their success can only come by lowering prices to undersell their
competitors. If prices go too low, this can threaten profits. How can a
capitalist sell cheaply, but make the most money? One way is to reduce the
costs of production. In other words, capitalists need to produce more in less
time by increasing productivity – improving equipment, rationalizing production,
increasing the division of labor, etc. The law of competition operates as a
whip upon the bourgeoisie, compelling them to improve productivity before their
competitors do, lest they go bankrupt. It doesn't matter if an individual
capitalist is a good and noble human being who treats their workers well. They
must submit to the system's dictates: "As capitalist, he is only capital
personified. His soul is the soul of capital."[8]

Yet a capitalist does not secure their profits in production, it must be
realized by selling commodities on the market. As Marx said: “A precondition of
production based on capital is therefore the production of a constantly
widening sphere of circulation, whether the sphere itself is directly expanded
or whether more points within it are created as points of production.”[9]
There is no guaranteed return on the market – which is faceless and dominated
by great risk. It is entirely possible for a capitalist to be a master of the
“art of the deal” on Monday and go bankrupt on Friday. This is not simply due
to competition, but because the system is governed by anarchy, not a conscious
plan. The uncertainty in regards to the return on investments and the
realization of profits means a capitalist must constantly expand their business
– which, in turn, depends on the maximum accumulation of capital and the
highest realization of profit.

B. Role of the working class

Ultimately, the drive for profit is a lust for more surplus value. So where
does surplus value come from? A capitalist can gain more surplus value through
outwitting their competition, or from price fluctuations, or from money
speculations. However, these are all short-term measures. In the long run,
capitalists need a commodity

whose use value possesses the peculiar
property of being a source of value, whose actual consumption is therefore
itself an objectification of labor, hence a creation of value. The possessor of
money does find such a special commodity on the market: the capacity for labor,
in other words labor power.[10]

The
special commodity that creates surplus value is found in the proletariat. When
a capitalist hires a worker for a wage, it is not actually labor that they are
paying for, but their labor power. Marx explains the distinction between labor
and labor power:

The use value which the worker has to offer to the capitalist, which he has to
offer to others in general, is not materialized in a product, does not exist
apart from him at all, thus exists not really, but only in potentiality, as his
capacity. It becomes a reality only when it has been solicited by capital, is
set in motion, since activity without object is nothing, or, at the most,
mental activity, which is not the question at issue here. As soon as it has
obtained motion from capital, this use value exists as the worker’s specific,
productive activity; it is his vitality itself, directed toward a specific
purpose and hence expressing itself in a specific form.[11]

Like
other commodities, labor power possesses both use value and value. The use value
of labor power is labor, which the capitalist utilizes by putting the
proletariat to work. For the capitalist: “What was really decisive for him was
the specific use value which this commodity possesses of being a source not
only of value, but of more value than it has itself.”[12]

The value of labor power is determined by the socially necessary labor time
required to keep the worker (and their family) alive. Let us assume that in the
course of a normal working day of 8 hours, the worker produces $100. However,
the cost of reproducing labor power is only $50, which the worker completes in
just 4 hours. This fact does not prevent the capitalist from having the
proletarian labor for a normal working day of 8 hours. What the proletarian
produces during the remainder of the day is surplus labor, which produces
surplus value or profit, which is in turn pocketed by the capitalist. In other
words, the purchase and sale of labor power by capital is the source of profit.

C. Rate of surplus value and rate of profit

Now let us look closer at capitalist production. The capitalist purchases labor
power in order to produce a profit. All capitalist production can be
represented in the following formula: C+V+S. The value of a commodity consists
of two parts: one portion represents used up value and the other is newly
created (or surplus) value. First, let us view the total capital advanced by
the bourgeoisie: C+V. During the labor process, workers utilize the instruments
of labor in order to transform material into finished products. Out of the
final product, materials of production or investments by capital such as
equipment, machines, tools, etc. are used up in the course of production to
make a commodity – this is designated by Marx as “constant capital” or C.
However, the means of production, no matter how expensive they are cannot
produce new values, unless they are put to work by living labor. The value
created by living labor thus consists of two portions: one part is variable
capital or V, which is the proportion of capital that is invested in wages paid
to the workers. The other portion is surplus value or S, which is new value
created above the necessary labor that the worker requires to live. The rate of
surplus value or the rate of exploitation of the working class is represented
by the formula S/V – which is the ratio of surplus labor time that workers produce
above their necessary labor time. The division of living labor time into
necessary labor time and surplus labor time is the basis for the profits that
sustain capitalist society. For the capitalist, it is the rate of profit that
is truly decisive for them. The rate of profit is represented by the formula
S/(C+V), which shows the ratio between surplus value and the total capital
advanced (C+V). In turn, we can use the rate of profit in a given cycle of
production (say a year) to determine the rate of profit in the abstract. For
the bourgeoisie, it is the rate of profit that regulates accumulation.

Let us look more closely at the drive to return to accumulate and gain profits.
If the source of surplus value is surplus labor, then the capitalists can
increase the length of the working day without increasing the daily wage to
ensure more surplus value is produced. If the worker produces their wage in 4 hours,
then increasing the working day from 8 to 10 hours will increase surplus labor
time from 4 to 6 hours or by 50%. Correspondingly, the rate of surplus value
increases from 100% to 150%. This method of increasing surplus value by
lengthening the working day is absolute surplus value. From the onset of
capitalism, there is a continual push by capital to increase the length of the
working day and resistance in turn from the working class. Capitalists want to
squeeze more profit from the workers, while the proletariat doesn't want to be
worked to the bone. According to Marx,

We see then that, leaving aside certain
extremely elastic restrictions, the nature of commodity exchange itself imposes
no limit to the working day, no limit to surplus labor. The capitalist
maintains his rights as a purchaser when he tries to make the working day as
long as possible, and, where possible, to make two working days out of one. On
the other hand, the peculiar nature of the commodity sold implies a limit to
its consumption by the purchaser, and the worker maintains his right as a
seller when he wishes to reduce the working day to a particular normal length.
There is here therefore an antinomy, of right against right, both equally
bearing the seal of the law of exchange. Between equal rights, force decides.
Hence, in the history of capitalist production, the establishment of a norm for
the working day presents itself as a struggle over the limits of that day, a
struggle between collective capital, i.e. the class of capitalists, and
collective labor, i.e. the working class.[13]

Absolute surplus
value cannot be expanded without limit. Its most basic limit is the physical
capacity of the workers. Workers cannot labor for 24 hours a day over the long
term without dying. Generally, capitalists just want to exploit labor power,
they don't want to destroy the source of their profits. Even if the capitalists
have a steady supply of workers whom they are willing to work to death, the
workers themselves don't wish to die. They will resort to forms of resistance
such as sabotage, unionization or strikes in order to force the capitalists to
shorten the working day.

A second way to increase the rate of surplus value is to reduce the labor time
needed for the proletariat to reproduce their wages by either increasing
productivity or cutting wages. This generates relative surplus value. Again,
assume that the necessary labor time for the workers to reproduce their labor power
is 4 hours during an 8-hour day. If that necessary labor time can be shortened
to 2 hours, then surplus labor time increases from 4 to 6 hours. The increase
in relative surplus value generally results from the growth in the productivity
of labor and causes the prices of commodities to fall – such as cheaper food or
clothing, etc. – meaning it costs the workers less to buy their necessities. An
increase in the productivity of labor can come from introducing new machines,
more rationalization of the labor process, better organization of labor, etc.
Another way is by cutting wages below the cost of labor power. Marx says: “The
surplus labor would in this case be prolonged only by transgressing its normal
limits; its domain would be extended only by a usurpation of part of the domain
of necessary labor time.”[14] Naturally, wage cuts can't be reduced
indefinitely without impairing the ability of workers to maintain themselves or
leading to resistance.

D. Organic composition of capital

Naturally, capitalists use all these methods to increase the rate of
exploitation and their profits, while the working class resists them. The
collective strength of the proletariat can force their class enemy to limit the
length of the working day and raise wages, so the foremost means to raise the
rate of exploitation is by increasing the productivity of labor. Ironically,
the ways which capitalism uses to increase the rate of exploitation lowers the
rate of profit at the same time.

The logic of competition drives capitalists to lower commodity prices in order
to gain an advantage on the market, so they are willing to pursue any avenue
that lowers costs. Capitalists are also involved in struggles over control of
the labor process and production. In order to increase productivity, capital
needs to mechanize production with more efficient machinery to utilize less
labor. Therefore, capital can produce more commodities with more productive
machinery employing the same number or even less workers than before – which
lowers their labor costs. In regards to C/V, C increases in proportion to V – or
the part of total capital representing raw materials, machines, equipment, etc.
(constant capital or C) increases due to advances in mechanization and other methods
that increase labor productivity. However, the part devoted to wages (variable
capital or V) does not rise and may even fall. The fraction C/V – the organic
composition of capital – is the ratio between constant and variable capital
that tends to rise. In other words, the higher the productivity of labor, the
organic composition of capital will be higher too. Capitalism's great advances
in technology from the assembly line, robotics and computers are proof of the
system's dominant tendency to raise the productivity.

However, it is not enough for capital to simply produce commodities, they need
to be sold for profit to be realized. Unsold goods don't make any profits. Once
a stock of goods is sold, the capitalist uses a portion of the money for their
own luxury and upkeep (hence it is withdrawn from the production process), but
another portion is thrown back into the production process to accumulate more –
by purchasing more constant capital (such as machines, buildings, etc.) or more
variable capital (hiring more workers). All of this fuels the drive to
accumulate capital.

E. Concentration and centralization

Due to the increasing organic composition of capital, the total value from the
final commodity comes more from constant capital than from variable capital.
However, this process does not mean that all capitalists progressively increase
constant capital as opposed to that of variable capital. Due to competition,
the increasing organic composition of capital occurs in a chaotic, unplanned
and antagonistic way. In this cutthroat game, smaller capitalists are eaten up
by larger ones – leading to the centralization and concentration of capital.
Marx says of the concentration of capital:

Every individual capital is a larger or
smaller concentration of means of production, with a corresponding command over
a larger or smaller army of workers. Every accumulation becomes the means of
new accumulation. With the increasing mass of wealth which functions as
capital, accumulation increases the concentration of that wealth in the hands
of individual capitalists, and thereby widens the basis of production on a
large scale and extends the specifically capitalist methods of production.[15]

At the
same time that capital is concentrated, there is also a tendency to
centralization. Centralization is the grouping together of different capitals
(whether by fusion, hostile takeovers or destroying competitors) into
joint-stock companies or corporations. Centralization results in greater
technical developments (increased capital allows more possibilities of
investment and the utilization of more efficient machines) without necessarily
growing the total amount of capital. Centralization enables capitalists to
extend the scale of their operations and utilize a more comprehensive
organization of collective labor leading to great advancements in productivity,
more possibilities for investment, increased access to machinery and workers:

This fragmentation of the total social
capital into many individual capitals, or the repulsion of its fractions from
each other, is counteracted by their attraction. The attraction of capitals no
longer means the simple concentration of the means of production and the
command over labor, which is identical with accumulation. It is concentration
of capitals already formed, destruction of their individual independence,
expropriation of capitalist by capitalist, transformation of many small into
few large capitals. This process differs from the first one in this respect,
that it only presupposes a change in the distribution of already available and
already functioning capital. Its field of action is therefore not limited by
the absolute growth of social wealth, or in other words by the absolute limits
of accumulation. Capital grows to a huge mass in a single hand in one place,
because it has been lost by many in another place. This is centralization
proper, as distinct from accumulation and concentration.[16]

The
centralization and concentration of capital means the smaller capitalists who
lose out are transformed into managers, foreman or even sink to the level of
workers. Although the bourgeoisie claim to be horrified at the communist aim to
abolish private property, Marx and Engels remind them that there is no greater
destroyer of property than capitalism:

You are horrified at our intending to do away
with private property. But in your existing society, private
property is already done away with for nine-tenths of the population; its
existence for the few is solely due to its non-existence in the hands of those
nine-tenths. You reproach us, therefore, with intending to do away with a form
of property, the necessary condition for whose existence is the non-existence
of any property for the immense majority of society.[17]

It is capitalism
that destroys private property through the expropriation of the many by the
few.

Overall, the higher the organic composition of capital in a particular branch
of industry, the greater its concentration of capital. However, the opposite
also applies – the smaller the organic composition of capital, then its
concentration is smaller. As Ernest Mandel says, “Why? Because the smaller the
organic composition of capital, the less capital is required at the beginning
in order to enter this branch and establish a new venture.”[18] In general, it
is easier to start a new website than to open an airplane factory.

Two things fuel the centralization of capital: competition and credit.
According to Marx,

the progress of accumulation increases the material amenable to
centralization, i.e. the individual capitals, while the expansion of capitalist
production creates, on the one hand, the social need, and on the other hand,
the technical means, for those immense industrial undertakings which require a
previous centralization of capital for their accomplishment. Today, therefore,
the force of attraction which draws together individual capitals, and the
tendency to centralization, are both stronger than ever before.[19]

Competition
favors centralization since large-scale investments lowers production costs
which gives firms an edge on the market.

Credit is crucial to both centralization and the accumulation process since it
allows individual capitalists to gather together large amounts of money for
economies of scale. Marx says that credit, “soon becomes a new and terrible
weapon in the battle of competition and is finally transformed into an enormous
social mechanism for the centralization of capitals.”[20] Through credit, the
value of capital can be reduced through both vertical integration and profit
can rise due to quicker turnover time. Credit facilitates centralization since
it allows capital to utilize the full potential of technology and organization
for accumulation. However, credit can result in vicious competition “where
little fishes are gobbled up by the sharks, and sheep by the stock-exchange
wolves. In the joint-stock system, there is already a conflict with the old
form, in which the means of social production appear as individual property.”
Although credit speeds up the destruction of smaller capitals, overcomes
problems of realization and the expansion of capitalism; at the same time, it
partly contains the destructive contradictions of the system, it gives them
further reach and (through casino-like speculation) ensures that crises will be
more severe and widespread.

Although credit is generally a force of centralization, it can also be a force
of decentralization by opening up new branches of production. According to
David Harvey,

The centralization of money capital can be accompanied by a
decentralization in the organization of productive activity. A distinction thus
arises between financial and industrial forms of organization at the same time
as specific kinds of relations spring up to bind them together... The
proliferation of credit devices and financial stratagems therefore appears
vital to the preservation of capitalism and from this standpoint is indeed as
much an effect as a cause of accumulation.[22]

Overall,
the twin tendencies of centralization and concentration raise the specter of
monopolies. Yet capitalist monopolies run counter to the wisdom of bourgeois
“economists” and apologists, who claim that the system is defined by perfect
competition. Centralization and concentration arise out of competition. Even if
capitalism did begin with perfect competition, through the laws of competition,
monopolies would emerge. Contrary to bourgeois economists, there are processes
at work within capitalism itself that undermine perfect competition. According
to Marx:

In practical life we find not only competition, monopoly and the
antagonism between them, but also the synthesis of the two, which is not a
formula, but a movement. Monopoly produces competition, competition produces
monopoly. Monopolists compete among themselves; competitors become monopolists.
If the monopolists restrict their mutual competition by means of partial
associations, competition increases among the workers; and the more the mass of
the proletarians grows as against the monopolists of one nation, the more
desperate competition becomes between the monopolists of different nations. The
synthesis is such that monopoly can only maintain itself by continually
entering into the struggle of competition.[23]

Monopolies
do not mean that capitalism has eradicated competition. If capitalism
eliminated competition, then it would cease to be capitalism. Even with
monopolies, new industries emerge to cater to new needs. Rosa Luxemburg said
that small enterprises

play in the general course of capitalist development the role of pioneers of technical change. They possess that role in a double sense. They initiate new methods of production in well-established branches of industry; they are instrumental in the creation of new branches of production not yet exploited by the big capitalist. It is false to imagine that the history of the middle-size capitalist establishments proceeds rectilinearly in the direction of their progressive disappearance. The course of this development is on the contrary purely dialectical and moves constantly among contradictions.[24]

The basic
features of “competitive capitalism” remain with monopolies – capitalists
compete with one another to gain larger shares of profit (although this is now
intensified and done at a higher level). Monopolies arise due to the organic
composition of capital that causes the falling rate of profit, but allow some
capitalists to divide up the market and set up quotas, resulting in lowering
prices. By limiting production, monopolies can increase prices on commodities,
resulting in greater profits and more rapid accumulation.

F. The average rate of profit

To recap, the measure of profitability for the capitalist is not the rate of surplus
value S/V, but the rate of profit S/(C+V). The capitalist does not just have an
interest in obtaining the highest rate of profit possible: it is their
religion. Therefore, the capitalist needs to increase mechanization of their
firms – confronting the challenges of both labor and other capitalists – in
order to realize profit in the marketplace.

For surplus value to be realized as profit, all capitals that produce at the
average level of productivity will gain profits since they sell their
commodities at their values. In contrast, other capitalists who operate below
the average level of productivity will not realize the full amount of profits
that they produced.

What does it mean for an enterprise to operate below the average level of
productivity? Take the example of a car factory that produces 3,000,000 cars
with approximately 2 million worker hours, but the socially average time that
it normally takes to produce that many cars is 1 million worker hours. As a
result, this capitalist is wasting social labor time and will not realize the
entirety of the surplus value produced. Rather, this capitalist operates below
the average rate of profit. Since the total amount of surplus value produced is
a fixed quantity – dependent on the total number of labor from all workers in
production – there will be a number of firms who will not realize all the
surplus value produced because they are operating below the average level of
productivity. On the other hand, there is unrealized amount of surplus value
available, which is realized by firms who operate above the average level of
productivity. So taking again the example above, we have another factory that
produces 3 million cars are produced in 500,000 worker hours. This firm is more
efficient and able to economize on labor, so it is rewarded by society with an
above average level of profit. Since profit is the main driver of capitalism,
there will be moves away from low-profit areas to higher-profit ones. As
capital shifts from one branch to another, the rates of profit will tend to
approach the average level (which is more or less an abstract idea that the
real profit rates of different branches and firms hover around) without ever
reaching it in a definitive manner.

To determine the equalization of the rates of profit, we need to take the total
amount of surplus value produced by all workers in a particular country and
divide it by the total amount of capital investment during a given period of
time (say a year). Now if we remember, the rate of profit is the ratio between
surplus value and the total amount of capital investment: S/(C+V). This formula
is what concerns capitalists the most. Yet the rate of profit depends on the
rate of exploitation of the working class S/V. So if S/V equals 100%, then the
value produced is equally divided between wages and surplus value (which goes
to the bourgeoisie in the form of profits, interest, etc.). An 8-hour day is
divided equally between four hours of necessary labor time and four hours of
surplus labor time. Yet as the organic composition of capital C/V increases,
the rate of profit falls.

II. Breakdown[25]

A. The law of the tendency of the rate of profit to fall

Marx's analysis brings us to the “law of the tendency of the rate of profit to
fall” which is the result of the forces that give rise to capitalist
accumulation and growth alongside convulsions and crises. According to Marx,

The progressive tendency for the general rate of profit to
fall is thus simply the expression, peculiar to the capitalist mode
of production, of the progressive development of the social productivity of
labor. This does not mean that the rate of profit may not fall temporarily for
other reasons as well, but it does prove that it is a self-evident necessity,
deriving from the nature of the capitalist mode of production itself, that as
it advances the general average rate of surplus value must be expressed in a
falling general rate of profit.[26]

The importance
of this law cannot be overestimated – it shows that capitalist production
possesses internal barriers that prevent its continuous expansion.

In contrast to the classical economists who saw capitalism as “natural” and
eternal, recognition of the falling rate of profit portended its end. Marx
observed of the classical economist David Ricardo:

Thus economists like Ricardo, who take
the capitalist mode of production as an absolute, feel here that this mode of
production creates a barrier for itself and seek the source of this barrier not
in production but rather in nature (in the theory of rent). The important thing
in their horror at the falling rate of profit is the feeling that the
capitalist mode of production comes up against a barrier to the development of
the productive forces which has nothing to do with the production of wealth as
such; but this characteristic barrier in fact testifies to the restrictiveness
and the solely historical and transitory character of the capitalist mode of
production; it bears witness that this is not an absolute mode of production
for the production of wealth but actually comes into conflict at a certain
stage with the latter’s further development.[27]

In other words, the law of the rate of profit to fall showed that
capitalism is not eternal, but that it was an historical mode of production –
possessing a beginning and, eventually, an end.

Before moving on, we need to ask: what does it mean for the average rate of
profit to fall? While the average rate of profit tends to favor enterprises
with the highest organic compositions of capital, what happens when the average
composition of capital increases in all enterprises? Other things being equal,
the average rate of profit will fall.

Take the example of computer manufacturer A:

Year 1: 600 million C + 200 million V + 200 million S = $1,000 million

Year 2: 700 million C + 200 million V + 200 million S = $1,100 million

Year 3: 800 million C + 200 million V + 200 million S = $1,200 million

Rate of exploitation is S/V = 100%

Rate of profit is S/(C+V)

The increase in the organic composition of capital during years 1-2-3 means a
fall in the rate of profit:

Year 1 rate of profit: 200S/(600C+200V=800) = 25%

Year 2 rate of profit: 200S/(700C+200V=900) = 22.2%

Year 3 rate of profit: 200S/(800C+200V=1,000) = 20%

Through competition, the organic composition rises – resulting in both
increased labor productivity and mechanization in order to extract more
relative surplus value. However, the higher organic composition of capital
lowers the rate of profit. Capital can partially compensate for the rising
organic composition of capital through increasing the rate of surplus value (or
rate of exploitation). In the above example:

Year 2 rate of profit: 220S/(700C+180V=880) = 25%

Here, surplus value increased by 20, but variable capital decreased by 20.
Therefore, the rate of exploitation went from 100% in year 1 to 122% in year 2
(instead of remaining constant), while the profit rate remained at 25% instead
of falling. In other words, an increase in the rate of exploitation can cancel
out a lower rate of profit due to the increasing organic composition of
capital.

In the long run, can an increase in the rate of exploitation neutralize falling
rates of profit? Theoretically, there is no limit to rises in the organic
composition of capital, but there is an absolute limit of zero for V (with
total automation). In order to produce surplus value, capital needs to employ
workers and the portion of the working day where wages are reproduced cannot
reach zero. The amount of time devoted to necessary labor time can go from 4
hours to 20 minutes, which would be a major increase in productivity, but it
cannot go past zero. Therefore, increasing the rate of exploitation cannot
forever counteract the growth in the organic composition of capital and the
tendency for the rate of profit to fall is inevitable.

According to Marx, the tendency of the rate of profit to fall is

in every respect the most
important law of modern political economy, and the most essential for
understanding the most difficult relations. It is the most important law from
the historical standpoint. It is a law which, despite its simplicity, has never
before been grasped and, even less, consciously articulated.[28]

The falling rate of profit means capitalism contains within itself a
point where “it reaches a certain point, suspends the self-valorization of
capital, instead of positing it.”[29] Like other modes of production,
capitalism reaches its limits:

The growing incompatibility
between the productive development of society and its hitherto existing
relations of production expresses itself in bitter contradictions, crises,
spasms. The violent destruction of capital not by relations external to it, but
rather as a condition of its self-preservation, is the most striking form in
which advice is given it to be gone, and to give room to a higher state of
social production.[30]

Ultimately, the internal contradictions of capitalism “promotes overproduction, speculation and crises, and leads
to the existence of excess capital alongside a surplus population ... Capitalist
production constantly strives to overcome these immanent barriers, but it
overcomes them only by means that set up the barriers afresh and on a more powerful
scale”.[31] Despite capitalist efforts to overcome its
limits through reducing wages, widen the field of circulation or generating new
needs, in the end, their efforts result in a further decline in profit. As Marx
concludes:

The true barrier to capitalist
production is capital itself It is that capital and its self-valorization
appear as the starting and finishing point, as the motive and purpose of
production; production is production only for capital, and not the reverse,
i.e. the means of production are not simply means for a steadily expanding
pattern of life for the society of the producers.[32]

Marx does not discuss the law of the tendency of the rate of profit to fall as something
that works uniformly from year to year. Nor is it a natural law like gravity.
Marx's elaboration of the falling rate of profit is not a divine prophecy that
promises a communist future that the proletariat can just passively await as
surely as the rising dawn. Rather, as the rate of profit falls, it

provoke counter effects that inhibit this fall, delay it and
in part even paralyze it. These do not annul the law, but they weaken its
effect. If this were not the case, it would not be the fall in the general rate
of profit that was incomprehensible, but rather the relative slowness of this
fall. The law operates therefore simply as a tendency, whose effect is decisive
only under certain particular circumstances and over long periods.[33]

The laws
of capitalist development – centralization and concentration, rate of profit to
fall, etc. – if left unchecked would “entail the rapid
breakdown of capitalist production, if counteracting
tendencies were not constantly at work alongside this centripetal force, in the
direction of decentralization.” In Capital Volume III, Marx lists six
counter-tendencies that check or annul the falling rate of profit.

1. Increasing the intensity of exploitation of the working class

Marx refers to a topic we have discussed at length above – increasing absolute
surplus value by lengthening the working day which increases the amount of
surplus labor time extracted from workers without changing the amount of
necessary labor time. Other methods such as speed-ups or stretch-outs can
increase the rate of surplus value while lowering the amount of necessary labor
time. Naturally, these methods can be utilized at once and are not necessarily
connected to the falling rate of profit. However, a successful increase in the
rate of exploitation can only occur if capitalists defeat resistance from the
proletariat who will naturally fight back. Henryk Grossman pointed out: “The
increasing degree of exploitation of labor that flows from the general course
of capitalist production constitutes a factor that weakens the breakdown
tendency.”[35]

2. Depression of wages below the value of labor power

We simply make an empirical reference
to this point here, as, like many other things that might be brought in, it has
nothing to do with the general analysis of capital, but has its place in an
account of competition, which is not dealt with in this work. It is none the
less one of the most important factors in stemming the tendency for the rate of
profit to fall.[36]

3.
Cheapening of the elements of constant capital

This is not just through the greater utilization of machinery, but through
higher labor productivity, which lessens the costs of machines in use. This
increases the organic composition of capital, but it is done by lowering the costs
of constant capital, annulling its effects:

In other words, the same development that raises the mass of
constant capital in comparison with variable reduces the value of its elements,
as a result of the higher productivity of labor, and hence prevents the value
of the constant capital, even though this grows steadily, from growing in the
same degree as its material volume, i.e. the material volume of the means of
production that are set in motion by the same amount of labor power. In certain
cases, the mass of the constant capital elements may increase while their total
value remains the same or even falls.[37]

4.
Relative over-population

The availability of a large supply of cheap or unemployed labor that encourages
capital to invest in new branches of production, which are labor intensive and
employ very little machinery – where wages are below the average, “so that both
the rate and mass of surplus value in these branches of production are
unusually high.”[38]

5. Foreign trade

Through foreign trade, capitalists acquire materials more cheaply or sell them
for higher prices abroad than would normally be the case:

In so far as foreign trade cheapens on the one hand the
elements of constant capital and on the other the necessary means of subsistence
into which variable capital is converted, it acts to raise the rate of profit
by raising the rate of surplus value and reducing the value of constant
capital.[39]

Grossman
identifies foreign trade in the imperialist era as a form of unequal exchange:

In the examples cited above the gain of the more advanced capitalist
countries consists in a transfer of profit from the less developed countries. It
is irrelevant whether the latter are capitalist or non-capitalist. It is not a
question of the realization of surplus value but of additional surplus value
which is obtained through competition on the world market through unequal
exchange, or exchange of non-equivalents.[40]

Through
unequal exchange, advanced countries are able to gain more profit at the expense
of backward areas.

Lastly, foreign trade also introduces capitalism into new areas that have lower
organic compositions of capital and where higher rates of profit can be
obtained (other issues related to imperialism and breakdown will be handled in
more detail in the following section).

6. The increase of stock capital

Marx's final countertendency is more concerned with how the rate of profit is
calculated, but will be briefly discussed here. As capitalism develops, there
is an increase in share-capital by joint-stock companies, which can shift
production costs onto others – turning a portion of production capital into
interest-bearing capital (or credit). This allows for quickened turnover times
for capital, producing commodities not in a year, but six months, which allows
for a greater rate of return. This fosters a growth in circulation through the
development of more rapid forms of transportation and increased mechanization
of production. As an example, we can just look at the modern developments of
the credit industry or the internet, which have spawned astronomical
accumulation. However, Marx says of the use of credit,

although invested in large productive
enterprises, simply yield an interest, great or small, after all costs are
deducted – so called ‘dividends’....These do not therefore enter into the
equalization of the general rate of profit, since they yield a profit rate less
than the average. If they did go in, the average rate would fall much lower.
From a theoretical point of view, it is possible to include them, and we should
then obtain a profit rate lower than that which apparently exists and is really
decisive for the capitalists, since it is precisely in these undertakings that
the proportion of constant capital to variable is at its greatest.[41]

Although
these various counter-tendencies can blunt or even reverse the tendency of the
rate of profit to decline, they operate within prescribed limits. Eventually
the rate of profit to decline will reemerge as the dominant tendency.

This list is far from exhaustive and is only a brief summary from Marx's
unfinished work in Capital Volume III. According to economist Paul
Sweezy,

Marx's analysis is neither systematic nor exhaustive. Like so much else in
Volume III it was left in an unfinished state, and it is safe to conclude that
if he had lived to prepare the manuscript for the press himself, he would have
introduced extensive expansions and revisions at various points.[42]

While the
falling rate of profit is inherent to capitalism, the way Marx discusses the
laws of political economy is not the same as the laws of nature. According to
economists Ben Fine and Alfredo Saad-Filho, “laws and tendencies have to be
located analytically in the context of their sources and the more complex ways
in which they manifest themselves ... leading to undetermined – but, in
principle, understandable – outcomes...”[43] We should not forget that Marx's Capital
was written at various levels of abstraction, which means the laws described
never:

coincides directly with appearances....The conditions of capitalism
conceived in its pure form (which we have analyzed so far) and those of the
system in its empirical manifestations (which we have to analyze now) are by no
means identical. This is because a theoretical deduction involves working with
simplifications; many real factors pertaining to the world of appearances are
consciously excluded from the analysis."[44]

C.
Henryk Grossman and breakdown

According to Marx, it is possible for the rate of profit to fall while the mass
of profit increases since there is greater amount of capital employed. Although
this is not exactly a counter-tendency to the rate of profit to fall, it does
offset some of the economic consequences of the law. For instance, if profits
rise from $1 million to $2 million, this will not stop capitalists from
investing if the projected returns represent a 10% as opposed to an expected
15% return.

Grossman
says that even a rise in the mass of profit would eventually cause the rate of
profit to fall and the system would breakdown. To prove this, Grossman adopted
the reproduction schemes of the social democrat Otto Bauer (in part to disprove
Bauer using his own methods) who drew upon Marx’s model in Capital Volume II to prove that capitalist
accumulation could be both harmonious and limitless. Bauer's calculations
assumed a higher rate of accumulation of constant capital as opposed to
variable capital. Grossman employed the same model because it abstracted away
aspects of capitalism not considered (which could be introduced at a later
stage after the main elements of capitalism had been analyzed). While the rate
of profit declined in Bauer's model, he argued that it could get close to zero
without ever disappearing. However, Bauer had only extended his model for four
years and believed that this demonstrated “that capitalism could go on forever
without crises, so long as the output of exchange values from different
industries (simplified in the model to two departments of production, producing
means of production and means of consumption) was kept in the correct ratios.”[45]
Grossman took Bauer's assumptions and extended the model to 36 years. What he
found was that although the mass of profits continued to rise, capital was
unable to sustain production. Already at year 20, there is trouble “when the
absolute amount of surplus value available for the private consumption of the
capitalists has to fall, if the rate of accumulation of constant and variable
capital is to be maintained.”[46] By year 35, there would be no surplus value
available for either capitalists' private investment or to cover additional
investments. Grossman states that

Bauer’s scheme represents precisely this kind of planned, organized
production in which the managers know all they need to about demand and have
the power to adapt production to demand. In spite of this a tendency towards
breakdown emerges, valorization declines absolutely and a reserve army forms.
This only shows that the problem is not whether there is a surplus of
commodities or not. In fact we have assumed a state of equilibrium where, by
definition, there can be no unsaleable residue of commodities. Yet still the
system must break down. The real problem lies in the valorization of capital;
there is not enough surplus value to continue accumulation at the postulated
rate. Hence the catastrophe.[47]

Grossman
emphasized that the mass of profit is the trigger of capitalist crises. Despite
the rising mass of profit, at a certain point, capitalists will be unable to
buy more additional constant and variable capital: “Imperfect valorization due
to overaccumulation means that capital grows faster than the surplus value
extortable from the given population, or that the working population is too
small in relation to the swollen capital. But soon overaccumulation leads to
the opposite tendency.”[48] For Grossman, the falling rate of profit was key to
the breakdown of capitalism. He saw the breakdown tendency as a contradiction
between production as a labor process (the creation of value through the
exploitation of wage labor) and its competitive drive to accumulate profits:

As a consequence of this fundamentally dual structure, capitalist
production is characterized by insoluble conflicts. Irremediable systemic convulsions
necessarily arise from this dual character, from the immanent contradiction
between value and use value, between profitability and productivity, between
limited possibilities for valorization and the unlimited development of the
productive forces. This necessarily leads to overaccumulation and insufficient
valorization, therefore to breakdown, to a final catastrophe for the entire
system.[49]

Grossman
stated that crises were not the result of underconsumption or
disproportionality, but came from the rate of profit to fall which, in turn,
arose from the overaccumulation of capital. This being the case – efforts to
increase the purchasing power of the workers or to “organize” capitalism cannot
solve the deeper problems intrinsic to the system. The limits to capital are
“specifically capitalist limits and not limits in general. Social needs remain
massively unsatisfied.”[50]

Marx left no finished or worked out theory of crises – in fact, passages in Capital
can give vastly different answers on the cause of crises. For example, in Capital
Volume II, Marx argues against underconsumptionist causes of
crisis: "It is a pure tautology to say that crises are provoked by a lack
of effective demand or effective consumption.”[51] However, in Capital
Volume III, Marx says the opposite: “The ultimate reason for all
real crises always remains the poverty and restricted consumption of the masses
as opposed to the drive of capitalist production to develop the productive
forces as though only the absolute consuming power of society constituted their
limit."[52] One explanation for Marx's contradictory accounts and lack of
coherent crisis theory could mean he was offering only general outlines to
later integrate into a fully developed theory (which he did not live to
complete).[53] Arguably, capitalism has changed from the 19th to the 21st
centuries and a single theory cannot explain all these changes. Efforts to
create a mono-casual theory have proven difficult since reality is far more
dynamic and changing than any theory.

Still, Grossman asserts that the cause of both crises and breakdown is the
falling rate of profit:

Even if Marx did not actually leave us a concise description of the
law of breakdown in any specific passage he did specify all the elements
required for such a description. It is possible to develop the law as a natural
consequence of the capitalist accumulation process on the basis of the law of
value, so much so that its lucidity will dispose of the need for any further
proofs.[54]

While
each economic crisis has its own peculiarities and no individual crisis will
conform precisely to any general theory, this does not mean crises don't have
an underlying cause. Empirical investigation is needed to understand each
crisis, whether the credit crunch in 2008 or the Stock Market Crash of 1929,
since they are caused by different triggers. But a trigger is not an underlying
cause. As the Marxist economist Guglielmo Carchedi says:

If crises are recurrent and if they have all different causes, these
different causes can explain the different crises, but not their recurrence. If
they are recurrent, they must have a common cause that manifests itself
recurrently as different causes of different crises. There is no way around the
“monocausality” of crises.[55]

Grossman
agrees that Marx never developed “a comprehensive description of his theory of
crisis, that he made scattered conflicting attempts at an explanation in
various passages,” but the subject of his analysis was not crises, “but the capitalist
process of reproduction in its totality.”[56] Grossman does not discount
circulation and consumption as triggers for crises, but it is the declining
rate of profit that is the underlying cause. Like Marx, Grossman believed
counter-tendencies could slow down or even temporarily check the falling rate
of profit:

If we can show that due to various counteracting
tendencies the unfettered operation of the breakdown tendency is repeatedly
constrained and interrupted... then the breakdown tendency will not work itself
out completely and is, therefore, no longer describable in terms of an
uninterrupted straight line... Instead it will break up into a series of
fragmented lines... all tending to the same final point. In this way the
breakdown tendency, as the fundamental tendency of capitalism, splits up into a
series of apparently independent cycles that are only the form of its constant,
periodic reassertion. Marx’s theory of breakdown is thus the necessary basis
and presupposition of his theory of crisis, because according to Marx crises
are only the form in which the breakdown tendency is temporarily interrupted
and restrained from realizing itself completely. In this sense every crisis is
a passing deviation from the trend of capitalism.[57]

Over time,
counter-tendencies become progressively weaker and can not stop the onset of a
crisis, which is just a breakdown “that has not been limited by
counter-tendencies.”[58] Crises are a mechanism to heal the system where
“equilibrium is again re-established, even if forcibly and with huge losses.
From the standpoint of capital every crisis is a ‘crisis of
purification’."[59] Rising unemployment, wage cuts, the expropriation of
smaller capitalists by larger ones, and the restoration of profit set the stage
for recovery and the next cycle. Crises are inherent to capitalism and no
policy can eliminate them. This conclusion led Grossman to state that crises
create “objectively revolutionary situation … the system shows that it cannot
secure the living conditions of the population. From this objective situation
and through it the class struggle intensifies.”[60]

Contrary to his critics' claims, Grossman never said capitalism will
automatically collapse: "It should be evident that the notion that
capitalism must 'by itself' or 'automatically' collapse is alien to me... But I
did wish to show that the class struggle alone is not sufficient...”[61]
Rather, Grossman did not elaborate on the connection between economics and
politics since that

connection is obvious. However, while Marxists have written
extensively on the political revolution, they have neglected to deal
theoretically with the economic aspect of the question and have failed to
appreciate the true content of Marx's theory of breakdown. My sole concern here
is to fill in this gap in the Marxist tradition.[62]

His
theory of breakdown showed the economic conditions that can create a
revolutionary situation:

The meaning of a Marxist theory of breakdown is that the
revolutionary action of the proletariat receives its strongest impulse only
when the existing system is objectively shaken. This, at the same time, creates
the conditions for successfully overcoming the resistance of the ruling
classes.[63]

Class struggle is not the result on ill
will by malevolent socialists, but materially exists and is caused by the
immanent laws of capitalism. Communism is not a moral ideal to realize, but a
material necessity that the proletariat must consciously achieve.

D. Imperialism and breakdown

The development of finance capital and imperialism poses many questions in
regards to theories of breakdown. Is imperialism a new stage of capitalist
development that manages to overcome the breakdown tendency?

According to Lenin's theory of imperialism, finance capital, or the merging of
banking and industrial capital, became dominant at the beginning of the 20th
century. Lenin drew his analysis of finance capital from the Austro-Marxist
Rudolf Hilferding's 1910 work, Finance Capital.
Hilferding says:

A steadily increasing proportion of capital in industry ceases to belong to the
industrialists who employ it. They obtain the use of it only through the medium
of the banks that, in relation to them, represent the owners of the capital. On
the other hand, the bank is forced to sink an increasing share of its funds in
industry. Thus, to an ever-greater degree the banker is being transformed into
an industrial capitalist. This bank capital, i.e., capital in money form, which
is thus actually transformed into industrial capital, I call ‘finance capital’
…Finance capital is capital controlled by banks and employed by industrialists.[64]

Following
Marx, Hilferding argues that credit is essential to capital accumulation. The
development of joint-stock companies and corporations bring together capital
from many small shareholders and facilitate its concentration. On the surface,
this appears to spread capitalist ownership to a larger group of shareholders,
but in actuality, this accelerates the centralization and concentration of
capital. Hilferding describes the process:

As a member of the board of directors, the large shareholder first of all
receives a share of the profit in the form of bonuses; then he also has
the opportunity to influence the conduct of the enterprise, and to use his
inside knowledge of its affairs for speculation in shares, or for other
business transactions. A circle of people emerges who, thanks to their own
capital resources or to the concentrated power of outside capital which they
represent (in the case of bank directors), become members of the boards of
directors of numerous corporations. As a member of the board of directors, the
large shareholder first of all receives a share of the profit in the form of
bonuses; then he also has the opportunity to influence the conduct of the
enterprise, and to use his inside knowledge of its affairs for speculation in
shares, or for other business transactions. A circle of people emerges who,
thanks to their own capital resources or to the concentrated power of outside
capital which they represent (in the case of bank directors), become members of
the boards of directors of numerous corporations...[65]

According
to Hilferding, banks centralize money capital and gather together idle funds
that they lend out for productive use. At earlier stages of accumulation, banks
simply mediate the flow of money, but as accumulation grows, there are now
larger amounts of money in the banks. When banking is competitive and a single
firm is denied a loan, this didn't necessarily affect their business since they
could always go to other banks.

Similar
to industrial capital, Hilferding observed that there was a tendency of
monopolization among banks, which gave them access to enormous economic power.
As banks monopolized and concentrated, this facilitated the formation of
monopolies and cartels in other sectors of the economy where banks have
investments. This parallel monopolization allows banks to safeguard their
investments. However, the monopolization of one economic sector affects others.
They will control competitive industries that deal with monopolies unless they
form their own cartels or monopolies to defend their interests. The development
of finance capital means the monopoly sector of the economy expands. As the
financial power of banks grows, they take direct control of buying and selling,
and determining investment flows of industry.

Hilferding
claims the separation of financial and industrial capital (characteristic of
competitive capitalism) disappears in monopoly capitalism with their fusion:

Finance capital signifies the unification of capital. The previously separate
spheres of industrial, commercial and bank capital are now brought under the
common direction of high finance, in which the masters of industry and of the
banks are united in a close personal association. The basis of this association
is the elimination of free competition among individual capitalists by the
large monopolistic combines. This naturally involves at the same time a change
in the relation of the capitalist class to state power.[66]

Why has the development of finance capital
and imperialism led to colonialism, militarism and wars? Hilferding lists three
reasons: (1) finance capital's need to establish the largest possible economic
territory; (2) to close territory to foreign competition by walls of protective
tariffs; (3) to reserve it as an area of exploitation for natural monopolistic
combinations. Capitalists must always keep the largest amount of territory open
to investment and trade through state power:

But the intensity of competition arouses a desire to eliminate it altogether.
The simplest way of achieving this is to incorporate parts of the world market
into the national market, through a colonial policy which involves the
annexation of foreign territories. Thus, while free trade was indifferent to
colonies, protectionism leads directly to a more active colonial policy, and to
conflicts of interest between different states.[67]

According
to Hilferding, the rise of finance capital meant the different factions of the
ruling class coalesced in their drive for expansion. Bankers own land; urban
capitalists sit on the board of directors of banks through shared social
interests, marriage and backgrounds. “Finance capital, in its maturity, is the
highest stage of the concentration of economic and political power in the hands
of the capitalist oligarchy. It is the climax of the dictatorship of the
magnates of capital.”[68]

Hilferding saw one major process at work under finance capital: the concentration
and centralization of capitalism. The Bolshevik Nikolai Bukharin developed
another theory of imperialism that identifies two processes – the
internationalization and nationalization of capitalism, the growing
interdependence of the global economy, and its division into different blocs.
The international division of labor grows as transport, economic development
and improved communication create a single integrated world economy that serves
finance capital:

Capitalist interest imperatively dictates these steps. The international
division of labor, the difference in natural and social conditions, are an
economic prius which cannot be destroyed, even by the World War. This being so,
there exist definite value relations and, as their consequence, conditions for
the realization of a maximum of profit in international transactions. Not
economic self-sufficiency, but an intensification of international relations,
accompanied by a simultaneous "national" consolidation and ripening
of new conflicts on the basis of world competition—such is the road of future
evolution.[69]

When
monopolies controlling large sectors of the economy fuse with the state, this
creates state capitalism.

Bukharin believed monopolies were now totally unified under the sway of finance
capital and merging with the state “gives unprecedented significance to state
power in the ‘internal’ life of the peoples, the tentacles of this monster
penetrating every crack and embracing every aspect of social life.”[70]
Bukharin's vision was haunting – the imperialist state was a new Levitation
with an iron heel clamped down on the neck of the proletariat.

This view of the imperialist state was overly simplified and ignored the real
limits of state intervention. Both Bukharin (and Hilferding) overstated the
integration of the ruling class, ignored the relative autonomy of the state,
and the need of the ruling class to illicit consent from the population. Lenin
believed that Bukharin glossed over the contradictions that remained within the
capitalist class. Lenin agreed that capitalism had reached the monopoly stage,
but he did not argue that competition was eliminated within the nation-state.
Monopolies expanded and deepened anarchy of capitalism both nationally and
internationally, which produced “something transient, a mixture of free
competition and monopoly.”[71] According to Lenin, Bukharin was dealing with
imperialism as a pure abstraction, something he denied could exist. Lenin's
theory of imperialism viewed the world economy as a variegated, contradictory,
and constantly changing reality.

In contrast to Bukharin, Hilferding did not claim finance capital had done away
with competition and crises, but maintained the dominant tendency of capitalism
was towards breakdown:

The more free
competition is replaced by monopoly organization on the domestic market, the
more competition sharpens in the world market. If a river’s flow is
artificially blocked with a dam on one side of the stream, it presses on with
even less restraint on the side that is still open. Whether accumulation of
capital within the capitalist mechanism occurs on the basis of competition
amongst individual entrepreneurs or a series of cartelized, capitalist
production associations struggling against each other is irrelevant for the
emergence of the tendency to break down or crisis.[72]

Grossman questioned Hilferding's claim that
finance capital is completely dominant under imperialism. At lower levels of
accumulation, industrial capital did rely on banks in order to finance their
firms. He said: “The building of a credit system centralizes the dispersed
particles of capital and the banks acquire enormous power as mediators and
donors of industrial credit.”[73] At greater levels of accumulation, “industry
becomes increasingly more independent of credit flow because it shifts to
self-financing through depreciation and reserves.”[74] Under imperialism,
Grossman observed that finance in countries like France, Britain and the USA
does not rule industry, but it was industry that dominates the banks.[75]

Now we come to the question of capital export. As monopolies grew in size, they
gained a vast surplus of capital. While monopolies did restrict some
production, it simply wasn't possible for the bourgeoisie to consume all the
excess surplus value. To counteract this, monopolies sought investment in new
industries and sectors – including in the non-industrial world. Imperialism
arose to maintain the rate of profit, which was either falling or under
pressure due to the increasing organic composition of capital, leading to the
export of capital, colonial expansion and imperial rivalry across the globe.

Lenin said that capital export

is created by the fact that a number of backward countries have already been
drawn into world capitalist intercourse; main railways have either been or are
being built there, the elementary conditions for industrial development have
been created, etc. The necessity of exporting capital arises from the fact that
in a few countries capitalism has become ‘over-ripe’ and (owing to the backward
stage of agriculture and the impoverished state of the masses) capital cannot
find a field for ‘profitable’ investment.[76]

Lenin's case for capital export requires
qualification. For one, Lenin understood that most of the major capitalist
countries had become net exporters and more investment was flowing into them
than leaving (true now and in 1916). Most capital exports did not open up new
investments in the colonies, but went to other imperialist powers.

Taking control of resources and preventing rivals from gaining control of them
makes sense, but it does not explain why capital must be exported in order to
survive. Grossman says capital export is a result of a lack of opportunities on
domestic investments due to low profit rates. He claims that the reason for
capital export at the end of the nineteenth century resulted from the “absolute
overaccumulation of capital” in the industrialized countries. According to
Marx, overaccumulation occurs when increased investment “will not produce any
more profit, or will even produce less profit...[and] there would even be a
sharper and more sudden fall in the general rate of profit...”[77]

Therefore, overaccumulation occurs even
when capital yields a high interest and there is still a profit to be made, but
additional investment makes little sense. Grossman adds: “In practice the
additional capital will displace a portion of the existing capital so that for
the total capital a lower rate of profit results. However whereas a falling
rate of profit is generally bound up with a growing mass of profit, absolute overaccumulation
is characterized by the fact that here the mass of profit of the expanded total
capital remains the same.”[78] Further investment would cut into the
consumption of the bourgeoisie and firms reach “a state of capital saturation
where the over accumulated capital faces a shortage of investment possibilities
and finds it more difficult to surmount this saturation.”[79] To avoid this,
the bourgeoisie will cut back on investing at home and begin exporting capital.
In other words, the export of capital is a countertendency to breakdown.
According to Mandel,

The export of capital thus corresponds to a
fundamental law of the development of capital: the increase in its organic
composition, the tendency of the average rate of profit to fall, resisted on
the one hand by alliances between capitalists in the metropolitan countries,
and compensated, on the other, by the investing in the colonial countries the
average organic composition of capital was lower, and above all, the rate of
surplus value was much higher.[80]

The drive to export and find high profits
accelerates centralization and concentration of capital as monopolies overstep
their national limits. While monopolies could conceivably overcome competition
within their borders, this is more difficult on a global scale where they have
to compete with other capitalists backed by other states. Ultimately, the drive
for colonies and other sites of capital investment sharpens international
competition, which can periodically lead to wars of re-division.

Through foreign trade and capital export, imperialism cheapens constant capital
and increases the rate of surplus value by exploiting laborers in the
underdeveloped world, transferring profits to the mother country. Imperialism
spawned two world wars, from the 1950s to the early 1970s, but its
countervailing factors overwhelmed the breakdown tendency. During
this period, there was profitable investment at home and abroad. Declining
profit rates in the imperial centers in the 1970s led the ruling class to
restructure the economy to their benefit by renewing investment in countries
with low wages, lowering trade barriers, ending restrictions on capital export,
assaulting unions and the welfare state. For a time, these measures can
revitalize profit rates, but in the end, the breakdown tendency will reassert
itself.

E. Crisis and revolution[81]

There is no mechanical relation between economic crises and the development of
class (or revolutionary) consciousness. Antonio Gramsci identified this
misreading of a conjuncture as “economism,” or when there is an “overestimation
of mechanical causes.”[82] The economistic deviation states that crises are
directly determined by economic factors. The outcome of the crisis is not
determined in advance by the unfolding of an inevitable economic forces, but by
the interaction between various active classes and social forces, who “come
into confrontation and conflict, until only one of them, or at least a single
combination of them, tends to prevail.”[83]

A crisis does not mean that capitalism is utterly moribund on a straight line
of collapse. If this were the case, then the system would no longer have the
room or the flexibility to grant “reforms,” and so any struggle that limited
itself to reforms would be ruled out; likewise, every struggle of the workers would
be inherently revolutionary. This economistic approach believes that
revolutionary consciousness would naturally follow from fighting for immediate
needs. This underestimates the degree to which socialist and communist ideas
need to be fought for and adopted by workers – including by their advanced
sections. Rather, a crisis does not necessarily mean that the ruling class and
the state loses their ability to maneuver and adapt, since they possess greater
resources at their command. The state may still be able to grant reforms, make
sacrifices or co-opt movements from below. Gramsci argued:

The crisis creates situations which are dangerous in the short run,
since the various strata of the population are not all capable of orienting
themselves equally swiftly, or of reorganizing with the same rhythm. The
traditional ruling class, which has numerous trained cadres, changes men and programs
and, with greater speed than is achieved by the subordinate classes, reabsorbs
the control that was slipping from its grasp. Perhaps it may make sacrifices,
and expose itself to an uncertain future by demagogic promises ; but it retains
power, reinforces it for the time being, and uses it to crush its adversary and
disperse his leading cadres, who cannot be very numerous or highly trained.[84]

For
instance, during the Great Depression (and other crises), capital developed its
own strategies to recover (reshaping class alliances, restoring profitability,
and due to their control of the media, their narratives reach a wider
audience). In the 1930s, capital employed different methods to manage the
crisis – such as the New Deal and Fascism – with their unique mixtures of
coercion, consent, demagoguery and co-option. Often, left-wing forces are
disoriented by a crisis and unable to adapt themselves to the possibilities
that it offers, but remain bound by outmoded formulas and strategies.

What does this mean? One: economic crises are opportunities for capital to
reestablish their own hegemony, but no matter how severe the crisis, the system
will recover. As Lenin says:

This is a mistake. There is no such thing as an absolutely hopeless situation.
The bourgeoisie are behaving like barefaced plunderers who have lost their
heads; they are committing folly after folly, thus aggravating the situation
and hastening their doom. All that is true. But nobody can “prove” that it is
absolutely impossible for them to pacify a minority of the exploited with some
petty concessions, and suppress some movement or uprising of some section of
the oppressed and exploited. To try to “prove” in advance that there is
“absolutely” no way out of the situation would be sheer pedantry, or playing
with concepts and catchwords. Practice alone can serve as real “proof” in this
and similar questions. All over the world, the bourgeois system is experiencing
a tremendous revolutionary crisis. The revolutionary parties must now “prove”
in practice that they have sufficient understanding and organization, contact
with the exploited masses, and determination and skill to utilize this crisis
for a successful, a victorious revolution.[85]

In other
words, capital is generally able to find a way out of the crisis.

While a
crisis does not automatically produce revolution or a change in consciousness,
it does alter the terrain of struggle. As Gramsci says,

It may be ruled out that immediate economic crises of themselves produce
fundamental historical events; they can simply create a terrain more favorable
to the dissemination of certain modes of thought, and certain ways of posing
and resolving questions involving the entire subsequent development of national
life.[86]

A crisis,
in comparison to “normal times,” provides an opening for communists to explain
their ideas to a more receptive audience.

The passive fatalism of expecting some kind of one-to-one relation of crisis to
the revolutionary consciousness inhibits strategic thinking. If communists expect
consciousness to spontaneously develop, then they are not taking an active role
in the class struggle and neglecting the development of strategy. In the end,
without the conscious intervention of the working class and the seizure of
power, the crisis is resolved in favor of the ruling class. As Georg Lukács
says: "Only the consciousness of the proletariat can point the way that
leads out of the impasse of capitalism. As long as this consciousness is
lacking, the crisis becomes permanent, it goes back to its starting point,
repeats the cycle..."[87]

It is possible that capitalism will survive every revolutionary onslaught and
limp on from crisis upon crisis. In this case, capitalism is likely to destroy
the planet and the end result is what Marx and Engels called “the common ruin
of the contending classes.”[88] Rosa Luxemburg said that unless the working
class leads the transition to socialism, then the fate of humanity is one of
regression to barbarism: “A look around us at this moment shows what the regression
of bourgeois society into barbarism means...The triumph of imperialism leads to
the annihilation of civilization.”[89] The mere existence of capitalism is the
real barbarism that threatens us all. There is another choice: “This is a
dilemma of world history, an either/or; the scales are wavering before the
decision of the class-conscious proletariat. The future of civilization and
humanity depends on whether or not the proletariat resolves to bravely throw
its revolutionary broadsword into the scales.”[90] Either the proletarian
revolution is the breakdown of capitalism or capitalism is the destruction of
humanity.

III. Conclusion[91]

Rejection of the breakdown theory has been one of the hallmarks of the
abandonment of revolutionary Marxism. During the revisionist controversy at the
end of the 19th century, Eduard Bernstein said it was time to end the pretense
that Social Democracy was a revolutionary movement by recognizing what it was
in practice – a party of social reform. He claimed that it was necessary to
“update” Marxist theory to recognize that the predictions of capitalist
development, class polarization, crises, and breakdown had not borne themselves
out. Rather, Bernstein claimed that there was actually an increase in the
number of property owners and giant businesses were not swallowing up smaller
and medium-sized ones.[92]

Bernstein
said that Marx's contention that capitalism was destined to finally collapse
was an “abstract speculation.”[93] Capitalism was expanding with only periodic,
and less severe, fluctuations, and the lot of workers was growing better. The
system had developed “means of adaptation” such as cartels, syndicates, trusts,
systems of credit, improved communication and transportation – all of which
ended the possibility of severe crises by regulating and rationalizing
production. Since the system was here to stay, socialism should be conceived as
an ethical ideal and not a material necessity. This all led to the total
abandonment of a commitment to revolution and socialism.

Rosa Luxemburg took aim at the heart of the revisionist position – their claim
that capitalism had successfully adapted itself and could avoid breakdown and
collapse. She claimed that the so-called means for the adaptation of capitalism
– cartels, syndicates, credit system, etc. – that far from mitigating the
system's contradictions, actually intensify them. In regards to credit, she
stated that it

constitutes the technical means of making available to an
entrepreneur the capital of other owners. It stimulates at the same time the
bold and unscrupulous utilization of the property of others. That is, it leads
to speculation. Credit not only aggravates the crisis in its capacity as a
dissembled means of exchange, it also helps to bring and extend the crisis by
transforming all exchange into an extremely complex and artificial mechanism
that, having a minimum of metallic money as a real is easily disarranged at the
slightest occasion. We see that credit, instead of being an instrument for the
suppression or the attenuation of crises, is on the contrary a particularly
mighty instrument for the formation of crises.[94]

All these
forms of combination and “adaptation” end up escalating contradictions within
the world economy and sharpen the struggle between different capitalist states
that lead to war. None of the new developments within capitalism brought an end
to crises, but herald new and deeper ones. Bernstein did not understand

the necessity of crises as well as the necessity of new placements
of small and middle-sized capitals. And that is why the constant reappearance
of small capital seems to him to be the sign of the cessation of capitalist
development though, it is, in fact, a symptom of normal capitalist development.[95]

For
revisionists, it was necessary to deny the breakdown of capitalism because they
do not “propose to suppress these contradictions through a revolutionary
transformation. It wants to lessen, to attenuate, the capitalist
contradictions.”[96] If the revisionists were correct and capitalism did not
generate the economic preconditions and material need for socialism, then it
was just a Kantian appeal. Lenin echoed Luxemburg, saying:

The position of revisionism was even worse as regards the theory of crises and
the theory of collapse. Only for a very short time could people, and then only
the most short-sighted, think of refashioning the foundations of Marx’s theory
under the influence of a few years of industrial boom and prosperity. Realities
very soon made it clear to the revisionists that crises were not a thing of the
past: prosperity was followed by a crisis. The forms, the sequence, the picture
of particular crises changed, but crises remained an inevitable component
of the capitalist system. While uniting production, the cartels and trusts at
the same time, and in a way that was obvious to all, aggravated the anarchy of
production, the insecurity of existence of the proletariat and the oppression
of capital, thereby intensifying class antagonisms to an unprecedented degree. That
capitalism is heading for a break-down—in the sense both of individual
political and economic crises and of the complete collapse of the entire
capitalist system—has been made particularly clear, and on a particularly large
scale, precisely by the new giant trusts.[97]

There
have been many different debates on capitalist breakdown and durability in
socialist and communist movements since 1900,[98] but the question always
remains the same – if capitalism won't breakdown, then the need for socialism
recedes into the background, replaced with “practical” plans to increase
welfare spending or lowering taxes to increase workers' incomes. If capitalism
is prone breakdown, then

The struggle of the working class over everyday demands is thus
bound up with its struggle over the final goal. The final goal for which the
working class fights is not an ideal brought into the workers’ movement “from
outside” by speculative means, whose realization, independent of the struggles
of the present, is reserved for the distant future. It is, on the contrary, as
the law of capitalism’s breakdown presented here shows, a result of immediate
everyday struggles and its realization can be accelerated by these struggles.[99]

The reality of capitalist breakdown means
that communism is not simply a moral ideal to realize, but a material necessity
for the proletariat.

Appendix: Rosa Luxemburg

Rosa Luxemburg's Accumulation of Capital (1913) is a major theoretical work and a political
intervention on imperialism by one of the towering revolutionary Marxists of
the twentieth century.[100] In this work, Luxemburg was concerned not
only with imperialism, but how capitalism could reproduce itself. She described
capitalist production as

primarily production by innumerable private producers without any
planned regulation. The only social link between these producers is the act of
exchange. In taking account of social requirement reproduction has no clue to
go on other than the experiences of the preceding labor period. These experiences
remain private, not integrated into a social form. They do not always refer
positively and directly to the needs of society.[101]

According to Luxemburg, it was extremely
difficult for the different sections of the capitalist economy to achieve equilibrium,
resulting in “glut or shortage in some of the larger branches of production
lead to the same phenomenon in most of the others.”[102] In Capital:
Volume II, Marx demonstrated the abstract possibility of expanded
capitalist reproduction through his abstract of models of reproduction schema
between the departments of production and consumption. This model assumes that
there are only two capitals with the interaction of many capitals brought in at
a more concrete level. Marx identified two types of reproduction: simple and
expanded. In the first, the capitalists consume the entire surplus value and no
economic growth occurs. In expanded reproduction, the surplus produced is not
simply consumed by the capitalists. Instead, the surplus is divided between
capitalist consumption (luxury), workers (wages), and a remainder that can be
used to purchase new raw materials and machinery. In other words, expanded
reproduction is when capital accumulation and economic growth actually occur.

Luxemburg claims that for expanded reproduction to occur smoothly, the whole
product must be sold (realized) – meaning that demand must be completely met.
This leads her to ask where does the extra buyers for commodities needed to
satisfy demand and ensure the accumulation of capital come from? Luxemburg says
that demand cannot come from the proletariat since the capitalists pay them and
their wages are viewed as a displacement of the bourgeoisie's money. The
capitalists cannot sell to each other only for consumption, since that reverts
to simple accumulation, with no surplus directed for accumulation. Marx says it
is theoretically possible for capitalists to buy back the remainder and
reinvest it to ensure expanded reproduction. To Luxemburg, this makes no sense,
since at the beginning of the next production period, production will be
greater and the capitalists would have to spend even more of their money to
fully realize the product and keep accumulation going. Based on this reasoning,
Luxemburg believed she had discovered a flaw in Marx's reproduction schemes:
“...we have the roundabout that revolves around itself in empty space. That is
not capitalist accumulation, i.e. the amassing of money capital, but its
contrary: producing commodities for the sake of it; from the standpoint of
capital an utter absurdity.”[103] Therefore, expanded reproduction was
impossible. Ironically, other reformist socialists used Marx's reproduction
schema to argue that capitalism could accumulate smoothly forever without any
crises.

Luxemburg said a third force external to capitalism had to exist for expanded
reproduction to occur: “Only the continuous and progressive disintegration of
non-capitalist organizations makes accumulation of capital possible.”[104]
According to Luxemburg, trade between capitalist and non-capitalist sectors was
a necessity for the accumulation of capital. However, the search for
non-capitalist markets lead to imperialism and the struggle between different
states to dominate them. Some of the most moving parts of Accumulation
of Capital describe the rapacious nature of colonialism
throughout the world. Imperialism allows capitalism to cover the globe, but
paradoxically it causes the non-capitalist sources of accumulation to shrink.
As a result, capitalism is even more prone to crisis and breakdown. Luxemburg
recognized that imperial rivalry explained the role of militarism as “a
pre-eminent means for the realization of surplus value; it is in itself a
province of accumulation.”[105] The end result of imperialism is war, breakdown
and revolution: “For capital, the standstill of accumulation means that the
development of the productive forces is arrested, and the collapse of
capitalism follows inevitably, as an objective historical necessity.”[106]

However, Luxemburg's entire argument was built on a faulty premise – a
misreading of Marx's reproduction schemes. She confused the priorities of
individual capitalists with the needs of the system as a whole. For one,
capitalists can and do buy products from each another to increase their own
productive power. The system is not directed at increasing the consumption of
its workers, but profit and wherever demand exists – they will seek to profit
from it. Furthermore, capitalism can create new needs and find new profitable
opportunities within existing markets. Lastly, Luxemburg assumes that
capitalists have to sell all their products in each production cycle, which is
not the case.

In their joint misreading Marx's reproduction schemes, Luxemburg and reformist
socialists forgot their purpose. In the schemes, Marx had deliberately
abstracted away non-capitalists and everyone other than workers and
capitalists. The reproduction schemes aimed to prove how expanded reproduction
is possible by holding many variables constant (such as constant techniques of
production and the rate of exploitation) and maintaining definite proportions
are between the two departments. According to Roman Rosdolsky, the reproduction
schemes are “conceived at the highest level of abstraction and therefore
ignored many key features of capitalist reality – such as the existence of
non-capitalist classes, and areas of the world, external trade, the average
rate of profit, prices of production which diverge from values, etc.”[107]
However, Luxemburg ignored this and forgot Marx's dialectical method with its
use of abstraction. We cannot but agree with Rosdolsky that Luxemburg “clearly
underestimated the so-called 'Hegelian inheritance' in Marx's thought, and was
therefore not entirely conscious of the real structure of his work."[108]
Despite Accumulation of Capital's impressive
theoretical edifice, its conclusions depend upon accepting Luxemburg's
misinterpretation of Marx's reproduction schemes.

While Luxemburg was correct that capitalism is prone to breakdown, it was
Marxists such as Grossman who provided a more viable and superior account of
both imperialism and breakdown.

Notes

[1] Karl Marx, The Grundrisse (New York: Penguin Books, 1973), 159.

[2] Ibid.

[3] I am drawing on the work of Marxist political economists Henryk
Grossman and Michael Roberts, who both argue that the tendency of the rate of
profit to fall is the cause of capitalist breakdown. See Henryk Grossman, The
Law of Accumulation and Breakdown of the Capitalist System (London: Pluto
Press, 1992) and Michael Roberts, The Long Depression: How It Happened, Why
It Happened, and What Happens Next (Chicago: Haymarket Books, 2016), 12-29.

[25] Questions on the relationship of the falling rate of profit, its
relationship to crises/breakdown and place in Marxist theory are a contentious
field. For a sampling of some of the literature, aside from what is already
cited, see: Michael Heinrich, An Introduction to the Three Volumes of Karl
Marx's Capital (New York: Monthly Review Press, 2012), 141-154 and 175-8
(for does not support the law of the tendency of the rate of profit to fall);
Anwar Shaikh, “An Introduction to the History of Crisis Theories,” Marxismo
Critico.
https://marxismocritico.com/2013/06/07/an-introduction-to-the-history-of-crisis-theories/
; Anwar Shaikh, Capitalism: Competition, Conflict, Crises (Oxford:
Oxford University Press, 2016); Jim Miller, “Must The Profit Rate Really Fall?”
Marxists Internet Archive.https://www.marxists.org/subject/economy/authors/miller/frop.htm
; Michael Roberts, The Great Recession: Profit cycles, economic crisis- A
Marxist view (lulu, 2009). I found the following posts on Michael Roberts'
blog especially helpful in preparing this essay: “How Capitalism Survives,”
“Crisis or breakdown?” “The crisis of neoliberalism and Gerard Dumenil,”
“The US rate of profit 1948-2015,” “It’s a long-term decline in the rate
of profit – and I am not joking!” “Returning to Heinrich” (this last one
contains links to several articles on debates related to the falling rate of
profit). All can be found at Michael Roberts Blog https://thenextrecession.wordpress.com/
; Roman Rosdolsky, The Making of Marx's 'Capital' (London: Pluto Press,
1977), 376-381 and 398-411.

[72] Quoted in Kuhn 2006, 136. Ironically, both Hilferding and Bukharin from
opposite viewpoints (social democrat and communist) argued that imperialism
could overcome competition. While Bukharin believed that the imperialist state
ended competition within its borders, he did believe that competition remained
(and was intensified) at an international level – leading to war and
revolution. Some of Hilferding's formulations in Finance Capital suggest
that he believed competition was ending, but international competition
remained. By the 1920s, as a Minister of Finance in the Weimar Republic,
Hilferding believed that the state, finance capital and the working class could
work together to achieve organized capitalism where the economy would be
consciously planned and regulated – ending competition and crises – leading the
way to a peaceful transition to socialism. If Hilferding was correct then the
Marxist conception of both capitalism and socialism were wrong. However, the
1929 Depression (and subsequent crises), Nazism and the Second World War all
proved his ideas to be mistaken.

[73] Grossman 1992, 199.

[74] Ibid.

[75] Ibid. 200.

[76] “Imperialism, The Highest Stage of Capitalism – A Popular Outline,” LCW
22.241-242.

[81] This section draws heavily from my “Gramsci for Communists,” LINKS International
Journal of Socialist Renewal. http://links.org.au/node/4474 ; “Machiavelli
and the primacy of politics,” LINKS International Journal of Socialist
Renewal. http://links.org.au/node/4717

[91] The summary of the revisionist debate between Luxemburg and Bernstein
is drawn from my “The final aim is nothing: The politics of revisionism and
anti-revisionism,” LINKS International Journal of Socialist Renewal.
http://links.org.au/node/4677